TURMOIL IN BRAZIL: THE LENDERS; Approval of Rate Policy, But No New Financial Aid

The International Monetary Fund and the United States said today that they were heartened by Brazil's pledge to keep interest rates high and slash its budget deficit. But they offered no new financial aid and made clear that Brazil's economic fate is largely in its own hands.

As they shuttled around Washington seeking to explain and build support for their Government's decision to allow its currency to float in value, Brazilian officials said they had heard the message and were prepared to do what it took to re-establish the country's credibility in the ultimate court of economic policy, the financial markets.

Even before Brazil's central bank announced tonight that it was increasing overnight interest rates, Pedro Malan, Brazil's Finance Minister, told a news conference here that President Fernando Henrique Cardoso's administration was determined to take whatever steps necessary to avert a crippling new round of inflation. And he said the Government would intensify efforts to push through a package of tax increases and spending cuts intended to bring the budget deficit under control.

''We know additional measures may be required'' to improve the country's fiscal condition, keep the economy on track and maintain the confidence of investors, Mr. Malan said.

Afterward, a senior American official, speaking on condition of anonymity, said there was a ''shared judgment that the most important thing in Brazil was the pursuit of strong policies, which especially meant carrying through on deficit reduction measures, strong anti-inflation monetary policies and continued structural reforms.''

The American official said Mr. Malan ''made clear his own determination and President Cardoso's determination in a very complex political environment to carry through effectively; that was certainly something we welcomed.''

Michel Camdessus, the I.M.F.'s managing director, also offered encouraging words. ''I am personally very satisfied with the conversations that I.M.F. staff and management have had over the last weekend with Minister Malan and the Brazilian team,'' Mr. Camdessus said.

Mr. Malan said after arriving in Washington on Saturday that Brazil might ask the I.M.F. and individual countries, including the United States, to speed planned aid payments due to Brazil under a $41.5 billion assistance program negotiated last fall. The next set of loans, about $9 billion, is scheduled for release next month.

Brazilian and American officials said today, however, that there were no discussions about granting the loans ahead of schedule. Economists said that since Brazil was no longer daily defending the value of the currency, the real, the country had less immediate need to bolster its foreign currency reserves.

But Brazil, which took the first steps last week toward abandoning its old stable exchange rate policy without informing the I.M.F. and the Clinton Administration, will now have to accept closer scrutiny by the international lending organizations and the countries providing it with aid, including the United States.

In a statement issued here today, Mr. Malan said Brazil would ''intensify its dialogue'' with the organizations and countries providing aid and would ''establish new and more intensive procedures of continuous consultation'' with the I.M.F., including the possible opening of an I.M.F. office in Brasilia.

With financial markets around the world reacting favorably again today to Brazil's new currency strategy, and with the United States and the I.M.F. providing their stamp of approval, Brazil appears to have come through what could have been a disastrous collapse of its old strategy without any serious damage.

But the true test will come only when the country hits its next economic bump, as it inevitably will, or when an outbreak of the financial turmoil that has plagued the world since mid-1997 next sweeps through the markets.

Economists and policy makers see two possible outcomes for Brazil. Under the optimistic version, a temporary increase in interest rates and quick action to rein in the budget deficit restores confidence in the markets, allowing the currency to stabilize without dropping much further. Interest rates then come down, and the devalued currency allows Brazil to export more easily, helping economic growth without fueling inflation.

Under the pessimistic version, continued downward pressure on the value of the currency forces the central bank to keep interest rates cripplingly high. The economy stalls, forcing politicians into an agonizing choice between weathering a painful recession or reducing rates, a move that could send the currency plummeting and inflation sharply higher.

In 1992, Britain abandoned a policy of keeping the pound stable in value relative to the other main European currencies after a speculative attack of the sort that has become increasingly common in countries with underlying economic problems. Britain's finance minister at the time said the collapse of the stable exchange rate policy had him singing in the shower because it allowed him to reduce rates and give a boost to the domestic economy without worrying about the currency.

Given its history of hyperinflation and doubts among investors about its willingness to deal with its fiscal deficit, Brazil does not have that luxury. Mr. Malan, to the relief of the I.M.F. and the United States, explicitly said as much in his statement today, a message reinforced by the central bank's quick move to raise interest rates to help prop up the currency.

''In the new exchange rate regime, fiscal and monetary policies will have to play an even more crucial role in insuring price stability and conditions for sustained economic growth,'' Mr. Malan said.